Cycle count

A cycle count is an inventory management procedure where a small subset of inventory is counted on any given day. Cycle counts contrast with traditional physical inventory in that physical inventory stops operation at a facility while all items are counted at one time. Cycle counts are less disruptive to daily operations, provide an ongoing measure of inventory accuracy and procedure execution, and can be tailored to focus on items with higher value, higher movement volume, or that are critical to business processes.

ABC analysis

Most cycle counting applications use an ABC analysis, segregating items into various count frequencies.

Determining selection method and count frequency

There are several methods of selecting which items to count and with what frequency, and each method has strengths and weaknesses.

Pareto method

The Pareto method, derived from the Pareto principle, is to cycle count inventory by percentage of inventory value (cost multiplied by usage for period). Items with a higher determined value are counted more often, while items that have little movement are seldom counted.

This sophisticated approach appeals to accountants by minimizing the variance in inventory value, and is efficient from a supply chain management perspective, concentrating effort on higher volume of use items.^[1] The main shortcoming is that low value items may be ignored and cause an entire assembly line to halt while a minor component is re-ordered.

Cycle counting by usage only

Cycle counting by usage states that items more frequently accessed should be counted more often, irrespective of value. Every time an employee adds or removes an item, there is a risk of introducing inventory variance. Logical inventory zones can be set up to distinguish items depending on how frequently they are touched. This method may be biased against counting higher value inventory or require additional counting to satisfy accounting requirements.

Hybrid

Most cycle counting frequencies are determined first by Pareto frequency analysis, and then changing the count frequency, or ABC code, as needed per item is based on per piece value, how critical the part may be, or other factors. This method requires manual arrangement and is not statistically pure since arbitrary adjustments can be made.

Automation

To conduct efficient and accurate cycle counts, many organizations use some form of software to implement an inventory control system, which is part of a warehouse management system. These systems may include mobile computers with integrated barcode scanners that allow the operator to automatically identify items, and enter inventory counts via keypad. The software then transmits data to a database on a host system which can generate inventory reports.

Dangers

Cycle counts can introduce inventory errors if the cycle count process is poorly executed. Multiple locations per item, work in process, and lag in paperwork processing can each contribute to these errors.

References

1. ^ Essentials of Inventory Management, by Max Muller (p.188)